The Drainage Report

Drainage sales slow but forecasts still strong

Overview

“The UK economy ended on a relatively high note in 2002," says Mike Rigby whose company produced this report. "And with Japan, the rest of the EU, and Germany in particular slipping further from glory, the UK appeared a beacon of economic prudence and vitality. Even the US, which seemed immune to the effects of the economic ills that afflicted the rest of the world, reported a late flurry of poor figures and uncertainty.

“Since then a series of shocks at the start of the year is weakening growth, equity market recovery and consumer confidence both here and in the US. Plunging equity markets, awesome pensions liabilities, and the growing probability of war with Iraq are having an effect. AOL-Time Warner's $100 billion loss, a sum that exceeds the combined annual budgets of Egypt and Ireland, suggests the flood of red ink will continue to wash through 2003.

“Gordon Brown's halo slipped as Government spending looks set to exceed tax revenue forecasts, hinting at tax rises to come. Manufacturing and exports are in poor shape. And yet, astonishingly, through the deepening gloom UK consumers continue to spend and drive the economy forward.

“Interest rates may even fall below 4% sometime in the next few months, the housing market is slowing rather than crashing, and the UK economy looks set to continue on its 12th consecutive year of growth. On top of this is the continuing growth in home improvement, and the 200,000 new homes supply-demand gap in the South East, just acknowledged in Deputy Prime Minister John Prescott's plans for the next 15 to 20 years. This is good news indeed for the building industry and those who supply it.”

Building Drainage Sales - All materials

Just under a third of merchants saw sales of all types of building drainage products increase in the last three months compared with the previous three months. Thirty four per cent recorded a fall and a further 34% were unchanged.

A useful way to look at the results is by the net balance of merchants reporting either way. If for example 40% of merchants saw an increase in sales, 34% a decrease and 26% no change, the net balance would be +6%. Reverse the figures and it would be a net -6%. A net balance of zero implies that little has changed.

On this basis, a net -2% of merchants reported a drop in sales in the last quarter compared with the previous quarter (chart 1). A net 3% of small outlets experienced growth contrasting sharply with large merchants (-15%).

Merchants in the Midlands (17%) and Scotland (8%) saw sales rise compared with outlets in the South (-7%) and North (-18%) where sales fell.

Year-on-year, sales are stronger with a balance of just under one in two merchants reporting improved sales over the period (chart 2).

Medium-sized outlets and merchants in the Midlands and Scotland experienced the most widespread growth with none of those interviewed in the Midlands suffering a fall.

Independent outlets (56%) were ahead of merchants belonging to national chains (37%).

Building Drainage Sales: Above and Below Ground - Plastic Materials

October to December sales compared with the previous 3 months

ABOVE & BELOW Ground Plastics Drainage Products by size of firm

Size of Merchant	Increase	Decrease	Stay the same	Total	Base
Small	29%	24%	47%	100%	38
Medium	26%	24%	50%	100%	42
Large	30%	45%	25%	100%	20
Total	28%	28%	44%	100%	100

October to December sales compared with the previous 3 months

ABOVE & BELOW Ground Plastics Drainage Products by area

Area	Increase	Decrease	Stay the same	Total	Base
South	31%	33%	36%	100%	42
Midlands	31%	17%	52%	100%	23
North	23%	36%	41%	100%	22
Scotland	23%	15%	62%	100%	13
Total	28%	28%	44%	100%	100

Overall merchants noted little change in sales of above and below ground plastics drainage in the last three months compared with the previous three months.

A net -15% of large outlets saw sales fall over the same period. Small and medium sized outlets experienced growth (4%).

Merchants in the Midlands (13%) and Scotland (8%) recorded higher sales. However sales dropped in the South (-2%) and North (-14%).

Year-on-year a balance of just over one in two merchants reported better sales. Growth was most widespread among small and medium-sized outlets.

More merchants in the Midlands (77%) and Scotland (62%) improved sales than those in the South (38%) and North (55%).

Building Drainage Sales: Above and Below Ground - Non-Plastic Materials

A net -14% of merchants saw sales of above and below ground non-plastics drainage fall in the last quarter compared with the previous quarter. Significantly more small outlets recorded lower sales than large outlets.

Across the country sales of non-plastics drainage decreased, particularly in the South (-21%).

More national chain branches (-29%) suffered a drop than independents (-3%).

Year-on-year a net 15% of medium-sized outlets experienced growth compared with small and large merchants where sales declined (-17% and -6% respectively).

A balance of just over three in ten merchants in the Midlands grew sales with none of those interviewed in this region citing a fall. In the South (-4%) and North (-17%) sales decreased.

Product Mix

All merchants we spoke to sell above and below ground plastic drainage products. Just under six in ten sell other types of below ground drainage, such as clay and just over one in four sell other types of above ground drainage.

By volume 91% of drainage sales in the quarter were above and below ground plastic drainage (see chart 3). This is a rise from 87% in the last quarter's survey.

Employment

A net 6% of merchants increased staffing compared with three months ago. More large outlets took on staff than medium-sized merchants. Small outlets cut back.

Regionally there is a north/south divide with merchants in the South (12%) and Midlands (17%) reporting a rise in employment levels. In the North and Scotland a net -5% and -15% respectively reduced staff.

Stocks

A net 13% of merchants saw stock levels rise compared with three months ago (chart 4). Small (24%) and medium-sized outlets (14%) built up stocks compared with large merchants where they cut back (-10%).

More merchants in the Midlands (35%) and Scotland (23%) increased stocks than in the South (7%). Outlets in the North (-5%) cut stock levels.

Prices

A balance of just under three in ten merchants upped prices compared with three months ago (chart 5). More small outlets (40%) and merchants in the North (32%) increased prices.

Price Expectations

Looking ahead a net 80% of merchants expect to put up prices over the coming year. Expectations are similar across the board although forecasts are strongest among large outlets (95%) and merchants in the North (91%).

Profitability

A net 67% of merchants expect better profits over the next 12 months compared with last 12 months. Large (80%) and medium-sized outlets (74%) are more confident than small merchants (53%).

More outlets in the South (74%) and Scotland (69%) anticipate a rise in profits over the coming year but forecasts are also strong among merchants in the Midlands (61%) and North (59%).

Outlook

Merchants are positive with a balance of just over one in two forecasting better sales in the next quarter compared with the previous quarter (chart 6).

Large outlets (45%) and merchants in the Midlands (30%) are slightly more cautious.

A net one in four merchants are more confident now about the overall prospects for builders' merchants than three months ago (see chart 7). Confidence levels are similar among merchants of all sizes. Merchants in the Midlands, North and Scotland (35%) are more optimistic than those in the South (12%).

Looking at the building drainage market, a balance of three in ten of merchants are more optimistic about prospects than they were three months ago. Large outlets are more positive than small and medium-sized merchants.

A net 44% of merchants in the Midlands and Scotland are more confident followed by outlets in the North (32%). Merchants in the South are less bullish (17%).

Almost twice as many merchants belonging to national chains (43%) are more positive than independent outlets.

Problems

As with last quarter's survey, price cutting (53%) and margin squeeze (45%) were the main problems facing merchants in the last three months. This was followed by slow payments and bad debts (29%). Notably fewer merchants this quarter reported problems with supplier service and availability.

Thirty two percent of merchants mentioned price cutting in the market as the biggest problem faced in the last three months (see chart 8). This is an increase from 25% in last quarter's survey.

PROBLEMS FACED BY MERCHANTS IN LAST 3 MONTHS	% MERCHANTS REPORTING PROBLEMS IN Q4 02
Price cutting in the market	53%
Margin Squeeze	45%
Slow payments & bad debt	29%
Poor profitability	25%
Supplier service and availability	20%
Lack of sales leads	19%
Lack of confidence	19%
Low sales volume	17%
Too much volume	15%
Internal/operational problems	14%
Cash flow	11%
Supplier quality	8%
Bank's support, interest rates, charges	1%
Other	1%
No problems	13%
Base	100

Internet Usage

As seen in chart 9, just under two out of five merchants use the Internet on a daily basis. The number of merchants using the Internet on a weekly basis increased in this quarter's survey to 13% compared with 5% last quarter.

Fifty seven per cent of merchants that have a website say their customers are able to order online.

Comment

“As this survey shows”, says Mike Rigby whose company produced this report, “confidence is high. Prospects for drainage products and profits in 2003 are strong. New Build, RMI (Repair maintenance and improvements), and DIY have been on song in 2002, and merchants expect more of the same this year.

“But growth in one sector can stimulate growth in another. Growing interest in home improvement and DIY, spurred by TV programmes such as Ground Force, have boosted products such as hard landscaping into overdrive. Quick footed merchants are capitalising on this trend by improving stock holding, service and special showsites that draw both trade and homeowners into their branches. Once there good presentation, helpful, attentive staff keen to capture their details on a database to send them further information provides the basis for selling additional products over the years.

“National DIY retailers have made serious inroads on merchants' core trade business although not all merchants appreciate the extent of their progress. But if merchants can become as effective in capturing new DIY and home improvement business as the sheds are in capturing new trade customers then the future looks rosy indeed.”

The Drainage Report, a quarterly trends survey, is produced by Michael Rigby Associates and sponsored by Builders' Merchants News. The aim is to keep a finger on the market pulse and to monitor merchants' views and expectations of market movements in above and below ground building drainage products. Michael Rigby Associates specialises in research based marketing and consultancy for the home improvement and building materials' markets in the UK and Europe. The survey covers a representative sample of 100 builders' merchant outlets. Telephone interviews took place between the 14th and 16th of January 2003 across a balanced spread of size and type of merchant, and geographical area. Numbers employed was used as an indication of size. The size categories of merchant outlets are small (1-9 employees), medium (10-25 employees) and large (over 25 employees). Free copies of the full report from www.521621.com e-mail: sales@521621.com or call Lucia Di Stazio on (01453) 521621.